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Liquidators are not obliged to retain funds until a notice of assessment is issued, High Court rules

Posted on Dec 15, 2015

In a case closely watched by the tax and insolvency sector for two years, Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation), the High Court of Australia ruled that liquidators are not obliged to, and are not personally liable for, failing to retain sufficient funds for the purpose of discharging a tax liability until the Commissioner issues a notice of assessment.

What does this mean for practitioners?

The Commissioner must issue a notice of assessment in respect of a tax liability before the related retention obligation and personal liability can take effect. Consequently, unless the Commissioner utilises his broad powers and issues notices on an accelerated schedule, liquidators will likely have access to more funds during a winding up.

Secured lenders often prefer to enforce their securities as mortgagee in possession rather than by a receivership, to avoid of the risk of the receiver being obliged to retain sufficient funds to discharge the tax liability and giving the Commissioner a super-priority. This risk is now significantly reduced, because funds only need to be retained once a notice of assessment is issued. This may may lead to a resurgence in receivership appointments over agents for the mortgagee in possession.

The availability of assets for unsecured creditors remains constrained by Division 260 of the Tax Administration Act 1953, which prevents disposal until the Commissioner issues a clearance notice specifying the amount sufficient to discharge pre-appointment tax liabilities.

The requirement for a notice of assessment to be issued will provide certainty as to the amount that must be retained for tax purposes.

It remains unclear whether proceeds related to a retention obligation form part of a liquidator’s expenses in a winding up (which hold the highest ranking priority under section 556 of the Corporations Act 2001) or merely rank alongside other unsecured debt. Although Gordon J in dissent considered that proceeds were such an expense,2 the matter was not an issue on appeal and hence not accepted by the majority.

The Commissioner is unable to receive priority payment in respect of post-liquidation tax liabilities before a notice of assessment is issued (an issue discussed in our garnishee notices update).

We anticipate that the Commonwealth Government may consider legislative reform in response to the decision in order to protect existing revenue from the insolvency sector. In the meantime, the Commissioner may utilise his broad powers to issue notices of assessment as soon as possible after an asset sale, leading to insolvency practitioners (particularly receivers) attempting to pre-emptively disgorge sale proceeds.

Natasha Toholka is a partner at Hall & Wilcox lawyers. For more information see